Chip Taylor

Other people's money

The St. Louis Post-Dispatch has an editorial regarding the State Auditor's report on Missouri's CAPCO program. What's a CAPCO? The P-D explains:

In the mid-1990s, the Missouri Legislature decided that the state was short of venture capital. That's money destined for investment in risky small businesses. But the Missouri Constitution forbids the state to invest directly in private ventures. To get around the inconvenient matter of the constitution, the state set up a financial contraption that would leave Rube Goldberg in awe. It was built around tax credits, which are the right to skip paying a certain amount of state taxes.

First, the state invited private business to set up venture capital firms nicknamed CAPCOs. Next, the state went to Missouri insurance companies with a very sweet deal: For every $1 an insurer lent to a CAPCO, the state would give the insurer $1 in tax credits. The insurers, of course, collect interest on their loans. That makes it pretty tough for an insurance company to lose.

How much money are we talking about? The P-D continues:

So the CAPCOs are getting a lot of money to invest - $140 million by 2008. And CAPCOs get to siphon off $35 million of that in management fees. CAPCO owners don't have to invest their own money, but they can profit handsomely if they make good investments. It's pretty close to a free lunch - on the taxpayers, of course.

So, what happened with the money?

Well, the state gave a bunch of money to someone else, under the conditions that they invest it in companies that couldn't obtain funding elsewhere. The investors get to keep most of the profits if they are successful; if not, well it wasn't their money to begin with. What do you think happened with the money?

As of December, the CAPCOs had lost $65 million out of $89 million they invested. More than a third of the companies in which CAPCOs invested went broke.

But what do you do when the state is short of venture capital. That was the original problem, right?

Well, they said that was a problem. But:

On top of all that, it turns out that the state's money wasn't really needed at all. CAPCO money represents only 3.5 percent of the $2.5 billion in venture capital invested in Missouri from 1997 to 2003.

CAPCO: A failed solution to a non-existent problem.